Search and price dispersion in online grocery markets

Abstract

Consumers often purchase multiple products at a time from retailers, creating multi-product incentives for search. In this paper we consider how product variety affects consumer search intensity and the dispersion of prices in multi-product retail markets. We employ online grocery pricing data from four large retailers in the UK to estimate search costs and equilibrium price dispersion for food products under circumstances where: (i) consumers search for single products; and (ii) consumers search for multiple products at once. We compare estimates in each case between a model in which utility increases with product variety and a model in which utility is not a function of variety. Relative to our preferred specification with variety effects in utility, we find estimates of both search cost and search frequency to be biased upwards in single product settings when variety effects are ignored; however, we find estimates of search costs are biased upwards while search frequency is biased downwards in multi-product settings when variety effects in utility are ignored.